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Sunshine before the storm

Events
The Polish investment market has not lost any of its lustre and continues to attract investors from further and further afield, while developers are not having any problems at all in selling their products – agreed the experts gathered at Eurobuild CEE’s 6th Invested Interest–Investment Market Conference, which took place at the Intercontinental Hotel in Warsaw at the end of February. However, there was no such consensus when it came to the impact of the coronavirus

Almost everyone present had something to say about the coronavirus in the presentations and discussions, from the opening lecture to the closing panel [even though the first case of the illness in Poland was detected two days after the end of the conference – editor’s note]. “We are in a very similar situation to where we were in 2008,” declared Prof. Witold Orłowski, the chief economic advisor at PwC Polska, in his opening speech to the conference. “We have enjoyed a positive economic climate globally for several years, including on the real estate market. However, the size of the boom has varied from one country to another – there has been overheating in some cases, such as in the Czech Republic and Hungary. In other countries, like Poland, the price rises have been more modest. Such countries are in a better position – if you fly lower, the fall is less painful. Each cycle has to come to an end some day. A few issues have been building up in the global, European and Polish economies for several years now – and this is typical during a period of economic growth: soon or later there has to be a bigger or smaller adjustment. When there’s a glut of optimism it’s tempting to build up a stockpile of fireworks for the next expected celebration. But when there are a lot of fireworks lying around, a single spark could cause a catastrophic explosion. Everyone is wondering now if the coronavirus might be that spark. I’m no epidemiologist so I can’t judge whether it has this potential, but there’s no doubt that the economic and financial consequences of the virus are already being felt,” he said.

The discussion began with a panel on real estate investment in the CEE region led by Marcin Mędrzecki of Colliers International. “As a big fan of the Baltics, I would highlight the opportunities in Tallinn, Riga and Vilnius. I think these are only few of the growing capitals in Europe where prime yields are still between 6–7 pct. More importantly, many European international investors have yet to discover these opportunities and therefore haven’t been pushing the yields down there, but I believe this will change when our markets continue to grow. In terms of segments: homes for the elderly and mixed-use central office/retail assets are definitely worth a bet,” suggested Tarmo Karotam of Northern Horizon Capital. “Our focus is currently firmly fixed on Poland and Hungary. Poland, because it is undoubtedly the number one market in the CEE region, with the highest liquidity and a high availability of product. And Hungary because it is also attractive, having the best risk-adjusted returns in the region. Budapest still offers excellent value for money,” insisted Marco Kohla, the managing partner of GalCap Europe. So which market segments are set to be the hottest in the near future? “The residential-for-rent concept is on the rise across the CEE region, albeit still in an embryonic form in many countries. We see this more as a long-term trend, though. In the near future the hotel market will continue to flourish, including specialised segments like hostels. As more core money flows into the CEE region, the battle over the best properties is likely to intensify further. Prime yields in the office segment might continue to fall and reach all-time lows that people couldn’t even have envisaged a few years back,” he added.

The next panel, which was moderated by Bartosz Turek of HRA Investments, was devoted to the institutional housing rental market. Does this segment have the potential become the goose that lays the golden eggs? “It certainly could. As the office market continues to grow, there will be a flood of tenants looking to rent apartments, including those of a superior standard,” predicted Darek Węglicki of Catella Residential Investment Management. “But the basic problem with this market is the fact that it’s still in its initial phase – in Poland the portfolios of apartments that would interest serious investors simply don’t exist yet,” he admitted. “Portfolios are often created by buying out Polish developers, which is something we’ve been seeing since last year,” interjected Michał Stępień of AFI Europe, “developers that have large land banks are particularly in demand. Moreover, when we speak with domestic developers we are hearing that many are intending to build entire buildings for rent on their own, as security against a possible recession on the new home market. I think there will be many such projects over the next few years.”

The discussion panel was followed by the grilling session: ‘10, 20, 30 questions posed to...’ Daniel Puchalski. Knight Frank’s new managing partner gave a full answer to a question about trends on the Polish investment market in 2020. “We are currently seeing a lot of activity across all sectors of the Polish market. However, in my opinion ownership changes in funds and developers as well as the emerging PRS market will have the most significant impact on the market, on transactions and probably on new investment strategies. The emergence of the first few funds that are ready to develop hotel service units for rent based on service planning and 23 pct VAT is one interesting phenomenon to take note of,” said Daniel Puchalski.

After the sparring, there was a coffee break followed by two sessions that took place in parallel. The first began with two presentations. Firstly, Elżbieta Chmielowska of Santander Bank Polska talked of the best ways to finance particular types of projects. Those listening learnt how to make the best use of bonds, loans and mezzanine financing. The next speaker was Małgorzata Stochmal of Orange Nieruchomości, who gave a few examples of ‘reclaimed’ buildings that have had new life breathed into them after major refurbishments and a change of usage.

The next discussion panel, devoted to office projects, was led by Tomasz Puch of JLL and also proved to be highly stimulating. “I’m pleased that the demand for mid-range office buildings has also increased. Until recently, major investors were only interested in ‘prime’ projects, while their opportunistic counterparts concentrated on lower quality real estate. All the classes between them – and there are quite a few – were overlooked and rather neglected. The approach has now changed significantly,” insisted Jarosław Prawicki of Karimpol. “And no wonder: the supply gap that awaits us in 2021–22 means that the largest companies – provided they are still growing and thinking of moving to a larger office – are looking for space in projects due for completion in 2023 and beyond. Leases are currently being signed for 7–10 years and tenants are fighting over the best space,” pointed out Rafał Mazurczak of Echo Investment. “There’s no prospect of the office market overheating in Poland,” added Magdalena Kowalewska of Immofinanz, “companies are still growing intensively – through acquisitions and organic development. Furthermore, the market is being regularly supplied by subsequent waves of tenants entering the market. The supply gap will probably change the situation for some time, but it will not last forever.” “And strong demand plus low supply plus rising construction costs means only one thing: rent increases,” Jarosław Prawicki of Karimpol reminded us.

The final panel of the first session was focused on the future of the office market and was moderated by Przemysław Felicki of CBRE. “New office hubs are draining tenants from older buildings and this may soon become a challenge for their asset managers. The area around ​​Rondo Daszyńskiego in Warsaw is one such magnet, having avoided the mistakes made with Mokotów’s ‘Mordor’ business district, since it was created from the outset as a quarter in which office development complemented retail and residential. And with the metro station right there it simply couldn’t fail,” commented Piotr Trzciński, the Poland head of the transactions at Savills Investment Management. “We are now looking at the regional office markets and have even drawn up a plan to establish an office investment platform for provincial cities this year – the situation there is healthy and stable, and you can predict entry and exit levels with some confidence. Our plan is to invest in real estate in the centres of these cities,” revealed Piotr Fijołek, a senior partner at Griffin Real Estate. The difference in opinion also extended to the situation on the retail real estate investment market, which has clearly been in retreat. Interest in transactions has dropped, But the participants of the discussion did conclude that this may be a good time to go shopping when big discounts are on offer due to the lack of large players.

At the same time, session B of the conference was underway in the next room. It opened with a discussion on tax issues for investment, which was led by Justyna Bauta-Szostak of MDDP. One of the most important conclusions of this panel was that investors prefer to invest where the legal system is predictable and friendly. “Such factors are taken into account when formulating investment models that have a minimum of five years,” Małgorzata Dankowska of TPA Poland told us. “It’s worth recalling the situation more than two or three years ago when the tax authorities were looking to withhold VAT refunds in many cases. During this period investors became wary of entering the Polish market,” Sylwia Toczyska of Vistra Poland reminded us. Tomasz Ożdziński of EY commented that investors now are often telling him that the tax system in Poland is hostile towards them: “If we add in the changes to the judiciary system – regardless of where you stand on this issue, there’s a possibility that the courts might lose their independence – then it should come as no surprise that investors are raising doubts about Poland and even considering taking their money elsewhere. There’s a saying that money loves silence, but we’ve not had much quiet lately,” he lamented.

Logistics, e-commerce and light production are set to drive the development of the warehouse sector. The current growth in speculative space gives developers an additional reason to build more, was the conclusion reached by the warehouse panel. According to the speakers, 2019 was record-breaking for Poland in many respects. “It was a good year for the entire warehouse sector. In each region where we are active we either started construction work or completed it,” revealed Bożena Krawczyk of Segro. However, according to Tomasz Pietrzak of MLP, markets outside Poland are also showing increasing promise: “We will be opening new parks around Vienna and we are also doing better in Romania,” he declared. In the opinion of Jarosław Wnuk, the head of Bluehouse Capital, the time has now come for Poland to start comparing itself to such developed markets as Germany and the UK, rather than the rest of the CEE region. He feels that one of the reasons for the growing interest of foreign investors in the Polish warehousing market, including those from Asia, is the fact that Poland is now recognised as a developed country. For Artur Mokrzycki, the head of capital at Panattoni Europe, however, the big question is what direction the market is going to take in the future. “Logistics technology has been changing, it is still unclear what new trends are going to push this market forward,” he remarked. In his opinion, Poland still has advantages in a Europe without borders; however, many investors are still unaware of the potential of Poland’s light industry. Meanwhile, major changes await us, such as the growing impact of global risks including climate change. However, the higher construction costs and the shortage of qualified staff will pose the main challenges for the warehouse sector.

After the end of both sessions, everyone went off to lunch in high spirits – and for some more informal chat. But will we be able to meet in such a good mood next year?

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